Economic Reports Of Rising Prices And Slow Growth

According to reports released Tuesday from the U.S. Department of Labor: the Producer Price Index (PPI) – which measures the average change over time in the selling prices received by domestic producers for their output, increased 1.4 percent in May – versus an expected rise of 1.0 percent. This rise followed a 0.2-percent advance in April and a 1.1-percent increase in March.

The higher-than-expected May amount was due to the spike in energy and food prices.

Energy prices turned up 4.9 percent in May and are up 19.4 percent year-over-year. The index for finished consumer foods on the other hand, rose 0.8 percent in May following no change in the prior month. The index is currently up 6.6% versus last year registering this way the biggest increase in the last six months.

Conversely, core PPI – which excludes food and energy ; was in-line with estimates. Weak consumer demand has limited the ability of producers to raise prices. The year-over-year increase in PPI is now 7.2%. The year-over-year increase in the core rate is 3.0% versus last year, the largest twelve-month gain since 1991.

Crude prices increased 6.7% in May and have risen at a 100.9% annual rate in the past three months. Needless to say, galloping energy and food prices, which are especially squeezing business profits, figured prominently in the index’s pickup.

The high prices for fuel and raw materials combined with economic complications are taking a toll on manufacturers as well.

The Federal Reserve reported today that Industrial production in May unexpectedly dipped. Specifically, production declined 0.2% from the prior month, which was worse than the forecast of a 0.1% increase. Plants operated at 79.4 percent capacity with rate of capacity utilization for total industry declining 0.2 percentage point ; the lowest since September 2005 after the Gulf Coast hurricanes.

Manufacturing capacity utilization dropped to 77.5%, the lowest level since 2004. However, a word of caution and an important distinction here – since the Industrial Production Index is procyclical; that is, it rises during economic expansions and falls during recessions.

The current industrial production slowdown is still nowhere near the levels seen during the 2001 recession and in our view – it should be seen only in parallelism with the period of sluggish growth our economy experienced in early 2003. As in 2003, the sluggishness will transition to more rapid growth in the months ahead. Let’s not forget: the Federal Reserve’s rate cuts have temporarily caused business activity to slow down since some firms waited for rates to hit bottom. Now that the rates seem to have bottomed and are likely to rise – we believe that an increase in production will follow from this point forward.